How the Stimulus Act of 2009 Affects You and Your Home-Based Business

The House of Representatives and the Senate passed the American Recovery and Reinvestment Act of 2009 of 2009 last week. The president has indicated that he will sign it into law. Its cost is approximately $800 billion, but included in that figure is approximately $300 billion of tax relief with about $280 billion concentrated in 2009 and 2010. The new law makes more than 300 changes to the Revenue Code Internal. Most of them are retroactive to January 1, 2009, but some take effect on the date the President signs the massive legislation.

Some provisions that will have an immediate impact on those operating small businesses, including home-based businesses, are:

• Making Work Pay Credit: The credit is equal to 6.2% of the individual’s earned income or $400 ($800 for married filing jointly), whichever is less. It applies retroactively to January 1, 2009 and extends through 2010. 6.2% is the social security tax rate. Employers do not get any relief from their match. Self-employed workers qualify in addition to wage earners. The withholding tables will be adjusted to reflect the credit.
• Extension of 2008 Depreciation Bonus amounts to 2009 (2010 for 10-year property) – 50% first year depreciation bonus. It also includes higher caps on vehicle depreciation.
• The 2008 Section 179 extension amounts to 2009 – $250,000 for assets placed in service in 2009. The threshold for deduction reduction is $800,000.
• 5-Year Net Operating Loss Carryover for Qualified Small Businesses: Option to carry losses over 3, 4, or 5 years.
• Increased Earnings Exclusion of Qualified Small Business Stocks: Increases the earnings exclusion from 50% to 75% for certain small business stocks held for more than 5 years and purchased between the date of enactment and January 1, 2011 .
• Built-in earning period for S corporations reduced from 10 years to 7 years.
• Recognition of 5 years of income for cancellation of indebtedness for certain businesses.

The new law also has many changes that will affect both small business owners and the rest of the population:

• Increase in the refundable portion of the Child Tax Credit for 2009 and 2010
• The First Time Homebuyer Credit increased from $7,500 to $8,000 and was extended to homes purchased between January 1, 2009 and November 30, 2009. The credit does not have to be repaid for purchases during that period. Those who bought houses in 2008 are stuck with the 2008 law, which requires payment in 15 years.
• Alternative Minimum Tax exemptions increased slightly above 2008 amounts.
• “Above the line” deduction for state, local and excise taxes paid on new car purchases in 2009 made after the president signs the bill.
• Exclusion of the first $2,400 unemployment compensation benefits received in 2009
• Increase in the refundable amount of the Hope Education Credit and change the name of the credit to the “American Opportunity Tax Credit.”
• Increase in the Earned Income Credit for 2009 and 2010, including an increase in the phase-out limit.
• Residential Energy Credits, Alternative Energy Credits, and Renewable Energy Credits
• Work opportunity credits and tuition programs.
• Single payment of $250 to people with fixed income (similar to the 2008 Stimulus payment).

Almost everyone will be affected by this new law. As always, I recommend that you consult your tax advisor to determine how personally affected you will be.